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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, NetScout Systems (NASDAQ:NTCT) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on NetScout Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = US$68m ÷ (US$2.2b - US$382m) (Based on the trailing twelve months to December 2024).
Therefore, NetScout Systems has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 7.0%.
Check out our latest analysis for NetScout Systems
In the above chart we have measured NetScout Systems' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for NetScout Systems .
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 187%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, NetScout Systems appears to been achieving more with less, since the business is using 35% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
Our Take On NetScout Systems' ROCE
In a nutshell, we're pleased to see that NetScout Systems has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 22% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.